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Coronavirus, Low Yields Reveal Insurance Industry Haves and Have-Nots

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Nigeria’s insurance industry penetration is one of the lowest in the world, as only 1 percent of a population of 200 million have any cover.

The large chunk of the population have prioritized stomach insurance over a policy, which means taking a cover is least of their problems; the country overtook India to become the poverty capital of the world, and it isn’t surprising since over 50 percent of its population live on less than $1.98 a day.

It is generally accepted that there is a positive correlation between economic growth/ employment rate and the growth of the insurance industry. Of course, insurers that operate in developed countries have stronger balance sheets and solid working capital that allows them to absorb macroeconomic shocks.

Nigeria’s economy, which was already fragile before the outbreak of the virus, slipped into a second recession in a space of 5 years, and there are negative prognosis on economic recovery.

Analysts who spoke to MoneyCentral attribute slow growth in the Nigeria insurance space to lack of trust for the claims process, apathy towards insurance based on religious and cultural belief, and poor regulations.

Worthy to note is the cost of doing business is high, and insurers spend copious amounts of money on diesel oil to run generator plants at the head office and branches that sprawl across the country as electricity from the national grid is perpetually unreliable.

Little wonder ballooning operating and claims expenses ratios are responsible for deteriorating underwriting conditions and the combined ratio are increasingly approaching the 100 percent threshold.

Despite these challenges, some of the largest listed insurers have created profit for their shareholders.

For instance, the average industry annualized return on average equity (ROAE) increased to 10.30 percent in September 2020, from 7.57 percent the previous year, according to data gathered by MoneyCentral.

Interestingly, the combined net income of these firms increased by 13.58 percent to N23.98 billion in the period under review as against N21.15 billion the previous years, data by MoneyCentral shows.

There are winners and losers as far as returns are concerned, not all of them utilized shareholders’ resources in generating higher profit.

AXA Mansard Insurance Plc return on average equity or ROAE increased to 22.30 percent in September 2020, from 10.62 percent the previous year. Its net income surged by 168.74 percent to N5.61 billion in the period under review from N2.11 billion the previous year.

Lasaco Assurance’s ROAE increased to 13.70 percent in the period under review from 10.0 percent the previous year; while net income spiked by 32.88 percent to N862.55 million in September 2020 from N652.02 million the previous year.

Royal Exchange Insurance Plc’s returned to the path of profitability as ROAE stood at 9.70 percent from a negative figure (2.04 percent) as at September 2019.

Prestige Insurance’s ROAE moved to 11.40 percent in the period under review as against 7.14 percent the previous year; while net income surged by 66.68 percent to N751.17 million in September 2020 from N450.67 million the previous year.

Linkage Assurance Plc’s ROAE increased to 6.40 percent in September 2020 from 3.80 percent the previous year. Its net income spiked by 90.05 percent to N1.12 billion in the period under review as against N591.91 million the previous year.

Some insurers with very weak premium growth and rising operating expense ratio easily capitulated to the economic downturn and their shareholders may not be rewarded in the form of dividends.

African Alliance’s posted a loss after tax of N3.22 billion as at September 2020, and a worsening underwriting conditions resulted in underwriting loss of N7.14 billion. The insurer is technically insolvent as it has a negative shareholders’ fund of N13.86 billion.

Guinea Insurance Plc posted a loss after tax of N142.12 million in the period under review, and it has negative retained earnings of N1.96 billion, which underscores its recurring losses.

Analysts and investors have said insurance companies will walk on rotten ice as they expect a low interest rate environment and C0vi9-19 related headwinds to undermine future profitability in the face of dwindling investment returns.

“Broader fallouts from the pandemic in terms of lower demand and investment returns, a significant deterioration in the credit quality of fixed income securities and increased mortality rates from the virus could pressure earnings, reserves and profitability of life insurance sector in 2020,” said analysts at Afrinvest Securities Limited in a recent note to clients.

“For the non-life sector, a rise in COVID-19 related claims, premium rebates and lower interest rates could offset the increased demand for pandemic-related policies and reduce profitability,’’ said the analysts.

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